• you had enough sitting around right now to pay the taxes
  • you had at least 20 years until retirement
  • you expect at least 7% per year return
  • tax rate being the same as now (even though it will probably be higher)
  • 4
    What is your tax rate now and what tax rate are you expecting at retirement? – littleadv Jan 5 '15 at 17:15
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    There have been comments on this forum to the effect that you should not plan on having all your retirement income from Roth IRAs because the first $X of annual income is taxed at 0% and you are "wasting" this tax break by getting taxfree distributions from your Roth IRA. So, it might be nice to keep some money in your Traditional IRA that will, in later years, give you taxable income to fill up that $X. What do you think $X will be 20 years from now? – Dilip Sarwate Jan 5 '15 at 21:08
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    It would be in your favor to put money in a traditional IRA up until the point where your pre-tax retirement income will surpass your current income. Typically that will be more than a "small percentage". Unless you are investing a large percentage of your income, even ending with a 50/50 split is probably putting too much in Roth. – Red Alert Jan 5 '15 at 22:07
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    By the way, what are you comparing the conversion against? If you are comparing converting vs. not doing anything at all, then it's not a fair comparison because you effectively have more money in the same amount of Roth IRA than Traditional IRA, because it's after-tax instead of before-tax. For a fair comparison, you must compare the same amount of before-tax value in both cases. So the alternative to converting should be contributing the amount of money that you would have paid on taxes for the conversion into a (Traditional or Roth) IRA (assuming you haven't reached the limit for this year) – user102008 Jan 5 '15 at 22:42
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    @TravisR Multiplication is commutative, it doesn't matter when you apply taxes. Money * 1.07^yrs * tax is the same as Money * tax * 1.07^yrs – Red Alert Jan 5 '15 at 22:48

Taking all your assumptions:

With Roth, you take $6112 from work, (let's call you tax rate 10%) pay $612 in taxes, and contribute $5500 (the max if you are younger than 50). This $5500 will grow to $21,283 in 20 years at 7% annual growth ($5500*(1.07^20)), and you will pay no additional taxes on it.

With the traditional IRA, you take $6112 from work, pay $612 in taxes, and contribute $5500. You will receive a tax deduction at tax time of $612 for the contribution. This money will also grow to $21,283. This will be taxed at your ordinary income rate (which we're calling 10%), costing you $2123 at the time of withdrawal. You will have $19,155 left over.

  • Roth: $6112 -> $21,283
  • Traditional: $6112 -> $19,155 plus your $612 tax deduction


If you invest your tax savings from every contribution to the Traditional IRA, then the numbers wash out. Perhaps a pivotal question is whether you believe you will have greater taxable earnings from your investments in retirement than you have in taxable earnings today -- affecting the rate at which you are taxed.

  • Why are you not investing the $612 "refund" at the same rate for the same duration? Ignoring that is what created the diffrence. – JTP - Apologise to Monica Jun 6 '15 at 22:09
  • @JoeTaxpayer, do you invest your tax refund? However, I fear you are correct. The $612 can be invested in a different retirement vehicle (since the IRA is maxed out). If the 401k is also maxed out, then we may have to invest it in an account without tax-shelter. – BTC Jun 6 '15 at 22:48
  • To keep the numbers straight, I'd compare $6000 in the TIRA to $5400 in the Roth. Else, as you see, the simple math says it's a wash. The complex, stand on your head and play tricks game I offer in my answer changes the rules. +1 to you, and welcome to Money.SE. – JTP - Apologise to Monica Jun 6 '15 at 23:27

Even if you're paying a lot of taxes now, you're talking marginal dollars when you look at current contribution, and average tax rate when making withdrawals. IE, if you currently pay 28% on your last dollar (and assuming your contribution is entirely in your marginal rate), then you're paying 28% on all of the Roth contributions, but probably paying a lower average tax rate, due to the lower tax rates on the first many dollars.

Look at the overall average tax rate of your expected retirement income - if you're expecting to pull out $100k a year, you're probably paying less than 20% in average taxes, because the first third or so is taxed at a very low rate (0 or 15%), assuming things don't change in our tax code. Comparing that to your 28% and you have a net gain of 8% by paying the taxes later - nothing to shake a stick at.

At minimum, have enough in your traditional IRA to max out the zero tax bucket (at least $12k). Realistically you probably should have enough to max out the 15% bucket, as you presumably are well above that bucket now. Any Roth savings will be more than eliminated by this difference: 28% tax now, 15% tax later? Yes please.

A diversified combination is usually best for those expecting to have a lot of retirement savings - enough in Traditional to get at least $35k or so a year out, say, and then enough in Roth to keep your comfortable lifestyle after that.

The one caveat here is in the case when you max out your contribution levels, you may gain by using money that is not in your IRA to pay the taxes on the conversion. Talk to your tax professional or accountant to verify this will be helpful in your particular instance.


To answer your question point by point -

  • This is a given. If you don't have the money to pay the tax, stay clear.
  • Years to retirement is irrelevant. 20 may be a mistake, 2 may be right.
  • Rate of return also irrelevant so long as the cumulative return is positive.

I'd focus on the last point. The back of my business card -

tax table

Let's focus on Single. The standard deduction and exemption add to over $10K. I look at this as "I can have $250K in my IRA, and my $10K (4%) annual withdrawal will be tax free. It takes another $36,900 to fill the 10 and 15% brackets. $922K saved pretax to have that withdrawn each year, or $1.17M total.

That said, I think that depositing to Roth in any year that one is in the 15% bracket or lower can make sense. I also like the Roth Roulette concept, if only for the fact that I am Google's first search result for that phrase.

Roth Roulette is systematically converting and recharacterizing each year the portion of the converted assets that have fallen or not risen as far in relative terms. A quick example. You own 3 volatile stocks, and convert them to 3 Roth accounts. A year later, they are (a) down 20%, (b) up 10%, (c) up 50%. You recharacterize the first two, but keep the 3rd in the Roth. You have a tax bill on say $10K, but have $15K in that Roth.

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